CHIC - China: Stalling Recovery Modest Response?
2023-07-07 04:00:00 ET
Summary
- The sluggish momentum has been visible across a wide range of macro indicators.
- We anticipated China’s growth momentum peaking in 1Q but have been surprised by the pace of moderation.
- Amid China’s growth struggles, we remain bearish on the renminbi.
By Prashant Singh
China's policymakers are likely to respond to economic slowing with modest and targeted procyclical measures.
After a strong post-reopening rebound in first-quarter GDP, China's economic momentum has been easing. April and May activity disappointed, driven by ongoing property sector concerns and continued weakness in private sector investments. The sluggish momentum has been visible across a wide range of macro indicators, including weak property sales and construction activity, slowing retail sales, underwhelming aggregate financing data, and downbeat job numbers.
A structural employment mismatch continues as the surveyed unemployment rate remained at 5.2% in May but youth unemployment inched up to 20.8% - largely a result of job creation being concentrated in manufacturing, construction, and low-end services. We anticipated China's growth momentum peaking in 1Q but have been surprised by the pace of moderation. For now, we maintain our already conservative 2023 China GDP growth forecast of 5.3% but expect potential growth to slow to an annualized 3-4% over the next decade, with consumption driving the marginal gains. This should structurally weaken the "China impulse" supporting the global economy, especially through traditional commodity-linked channels.
The decline in activity has prompted a counter-cyclical response from authorities already, with the People's Bank of China cutting policy rates by 10 basis points last month. However, we expect further policy steps to be measured and targeted, for a few reasons. One, the official 2023 growth target of 5% should still be easily achievable given the low base last year. Two, with broader financial stability objectives, authorities won't want to fuel another round of debt-driven infrastructure spending. That would also be at odds with the core theme of "common prosperity," raising fears of further worsening income inequality. Finally, the policy focus has clearly shifted toward "high-quality" growth, keeping in mind employment, geopolitics, demographics, and productivity trends. Thus, likely measures could instead include: 1) accelerating local government special bond issuance catering to priority project financing, 2) consumption support measures in the electric vehicle sector, and 3) property easing measures in top-tier cities. We believe that talk of more than RMB 1 trillion in additional infrastructure financing and broad-based consumption subsidies is premature. However, policy responses may get more forceful if stability in the labor market comes under threat or growth falls significantly below target.
Amid China's growth struggles, we remain bearish on the renminbi. Not only are growth and interest-rate differentials stacked against it, but the PBoC's willingness to cut interest rates also suggests to us that policymakers are increasingly nonchalant about currency weakness.
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China: Stalling Recovery, Modest Response?